Buy Hero Motocorp For 16% Upside: IDBI Capital

Hero Motocorp Q2FY22 results:

As per the brokerage the company's earnings have been above its expectations on all of the parameters because of higher sales as well as operating margins. On the medium term basis, the management holds a promising outlook on volume growth because of:

1. Rural economic rebound owing to good and well spread monsoon

2. Distribution network re-opening in urban areas.

Q2FY22 Result Highlights: During Q2FY22, the company's sales declined by 9.8% YoY to
Rs.84.5bn, driven by 19.9% YoY volume decline and 12.6% increase in average realizations. EBITDA margins during the quarter contracted by
112bps YoY to 12.6%. PAT declined by 16.7% QoQ to Rs.7.9bn.

Investment Rationale:

Volume estimates have been lowered by the brokerage considering weak business situation:

To factor in soft business environment, we have lowered our volume estimates by 10.9% and 9.8% for FY22 and FY23 respectively. We have revised our PAT estimates downward by 16.4%/12.4% for FY22 and FY23 respectively.

Valuations of Hero Motocorp attractive:

The company has recommended a 'Buy' on the scrip of Hero Motocorp as the brokerage expects the auto major to report 9.5% volume CAGR and 16.7%
PAT CAGR over FY22-24E. At CMP of Rs2683, the stock is quoting at PE of 11xFY24 earnings, adjusted to associate values. "We rate the stock as BUY with new price target of Rs. 3,127 (13xFY24E earnings + Rs198 Associate Value).

Highlights of earnings call:

On new launches as well as other developments:

- During the review period, the company unveiled 'Xtec' motorcycle and new sophisticated Edge 125 focusing on premiumization. Retail sales have also initiated in the key Mexican market.

- The company's accessories and spares parts division during the period accounted for revenue of Rs. 11.4 billion, registering a decent growth of 40% YoY.

- The company's intent to boost up its accessories portfolio in the premium range shall also led of growth in the segment.

- The other operating income saw a good boost both YoY and sequentially to Rs. 2230 million during the review period versus Rs. 1870 million and Rs. 1100 million, respectively.

On Electric Vehicle (EV) launch and future outlook:

- The company's electric vehicle is to be launched before the end of the fiscal year 2022. The project is at presently in advanced stages and implemented at the company's Chittoor facility in AP. "The plant will have an integrated ecosystem for Battery Pack Manufacturing and Testing, Vehicle Assembly and Vehicle End of Line Testing (EOL)", adds the report.
- "The EV penetration in next 2 years will be driven by scooters with the current battery technology compared to Motorcycle segment", added the management.
- On the future growth, as per the Management, unit of economics and company's collaborations will lead to growth along with cost elements in focus.

Disclaimer:

This stock is picked from the brokerage report of IDBI Capital. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.